• SEC Approves Amendments Expanding Continuing Disclosure Requirements Under Rule 15c2-12
  • June 24, 2010 | Authors: Warren E. Greth; Emery B. McRill; Clinton W. Randolph
  • Law Firms: McGuireWoods LLP - Richmond Office ; McGuireWoods LLP - Baltimore Office
  • On May 26, 2010, the SEC approved certain amendments to Rule 15c2-12 (i) expanding the scope of the rule to cover variable rate demand obligations; (ii) augmenting certain reportable events (defined below), and adding new categories of reportable events; and (iii) providing a definitive timeline for disclosing reportable events. These changes will expand the continuing disclosure obligations of issuers and other obligated persons with respect to municipal securities.

    Background

    Under Rule 15c2-12, an underwriter may not purchase securities covered by the rule unless it has reasonably determined that an obligated person (i.e., an issuer and/or conduit borrower) with respect to such securities has undertaken to report both certain annual financial information relating to such obligated person (annual financial information) and the occurrence of certain important enumerated events relating to the security and/or the obligated person (reportable events).

    The amendments to Rule 15c2-12 (1) expand the scope of the rule to cover variable rate demand obligations; (2) add categories of reportable events; (3) eliminate the materiality qualifier for certain reportable events; (4) augment reportable events relating to the tax status of the securities; and (5) provide a definitive timeline for disclosing reportable events. The foregoing amendments to Rule 15c2-12 are scheduled to become effective December 1, 2010. These amendments will affect only "primary offerings" (as defined in the rule) of municipal securities occurring on or after December 1, 2010.

    (1) Expand the Scope of the Rule to Cover Variable Rate Demand Obligations

    • Currently, the continuing disclosure requirements of Rule 15c2-12 generally do not apply to municipal securities known as variable rate demand obligations (VRDOs). A VRDO is (a) a debt security, the interest rate on which is reset periodically, typically weekly or daily; (b) generally issued in denominations of $100,000 or more; and (c) generally subject to tender for purchase or redemption at the option of the holder at least as frequently as every nine months.
    • The amendments to Rule 15c2-12 will eliminate the specific VRDO exemption from the rule, requiring obligated persons with respect to VRDOs to report annual financial information and reportable events in accordance with the rule.

    (2) Add Categories of Reportable Events

    • The amendments to Rule 15c2-12 will add the following categories of reportable events to the rule: (a) tender offers; (b) bankruptcy, insolvency, receivership or similar event with respect to an obligated person; (c) any merger, consolidation or acquisition involving an obligated person or the sale of all or substantially all of the assets of an obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to such actions, if material; and (d) appointment of a successor or additional trustee or the change in name of a trustee, if material.

    (3) Eliminate Materiality Qualifier for Certain Reportable Events

    • Currently under Rule 15c2-12, an event is a reportable event only to the extent it (a) is listed as such in the rule and (b) is material.
    • As amended, Rule 15c2-12 will provide that the following existing events are reportable events, regardless of whether or not they are material: (a) principal and interest payment delinquencies; (b) unscheduled draws on debt service reserves reflecting financial difficulties; (c) unscheduled payments by entities providing credit or liquidity support for the securities (i.e. a bond insurer or a bank providing a letter of credit or a standby bond purchase agreement) or a substitution of such entities; (d) defeasance of the securities; and (e) changes in the rating of the security.

    (4) Augment Tax-Related Reportable Events

    • Currently under Rule 15c2-12, an obligated person is required to disclose any material adverse tax opinions or events affecting the tax-exempt status of the security.
    • The amendments to Rule 15c2-12 modify this category of reportable event, such that the issuance by the IRS of proposed or final determinations of taxability and Notices of Proposed Issue (IRS Form 5701 - TEB) are reportable events, whether or not they are material. Other notices and determinations with respect to the tax status of the security and other events affecting the tax status of the security also are reportable events, but only to the extent they are material.

    (5) Provide a Definitive Timeline for Reporting Events

    • Rule 15c2-12 currently requires the reporting of a reportable event "in a timely manner."
    • The amendments to Rule 15c2-12 establish a clear and definitive reporting deadline, requiring that each reportable event be disclosed in accordance with the rule in a timely manner not later than 10 business days after the occurrence of the reportable event. NOTE: The deadline is the 10th business day following the date of the occurrence of the reportable event, not the 10th business day following date on which the obligated person becomes aware of the occurrence of the reportable event.